“One way we gave small businesses more money to invest was by extending tax provisions on expensing.”
“If at first, you don’t succeed, take the tax loss.”
When I worked at Capital One, I managed a team that was in four different physical locations. My office was in Richmond, but one of my teams was in Tampa, Florida. I traveled there about once a quarter to meet with them, see how things were going, and then get the heck out of the way. I’d also try to do a dinner or lunch or something with my team leaders. Since I worked for Capital One, I had a Capital One business card to pay for my travel expense account.
To prevent fraud, waste, and abuse as well as to set prudent limits on spending on just such activities, Capital One had a limit for how much you could spend on meals in a given quarter. When an organization has hundreds, if not thousands of people who are on corporate expense accounts, this is wise and required.
When I co-founded my last company, we also had corporate credit cards for the owners and for employees who had to travel a lot. We didn’t have strict rules and regulations about spending. Our rule, spoken, but unwritten, was “don’t waste money on stupid [CENSORED].” Our team really stuck to that, too. There were a lot of cheap breakfasts and lunches, but, on almost every trip, there was one really nice dinner. We didn’t begrudge the nice meals at all – people were traveling and away from their families, and probably working 12-hour days, both on the client’s site and then back at the hotel.
Even though I was a co-owner of the company, I never mentally accounted for spending on meals as coming out of my own pocket. When we’d create our family budget for food and entertainment, if I was traveling, I’d deduct that time’s worth of my eating from our budget. Of course, it usually went to my wife, who would make extra trips to the kebab shop for her meals rather than making something at home. But, in general, we wound up spending less in months where I traveled for business, since the company was paying for my food when I was on the road.
Recently, I went to an afternoon meeting about an hour and fifteen minutes away from Hull Financial Planning World Headquarters. I headed home at about 7:00, and my stomach was rumbling. I considered stopping off and grabbing dinner.
I was, after all, on business travel and could expense the meal.
Then I remembered. I fully own this company. It’s a pass-through entity. Its income and expenses are my income and expenses.
I kept driving. We had chicken at home that I’d already grilled. There was no point in taking money from the food budget just because I was driving.
I had to adopt a different mentality about spending while traveling as a solo entrepreneur. Yes, I was a co-owner in my last company, so there was a direct line between my spending and money in my pocket, but since there were other owners and a lot of people involved in the company, the connection was attenuated in my mind. As a solo entrepreneur, there’s no attenuation. It’s all one bucket of money, and my spending while traveling meant I couldn’t spend on something somewhere else, like a meal with my wife, which I’d enjoy more.
Just because you’re financially independent doesn’t mean that you suddenly lose the sense of proportionality in spending. I’d just been telling a client that I didn’t care about frugality writ large; I’d rather see her spending disproportionately on the things which mattered most to her.
I love travel. I love soccer. I really enjoy going out to restaurants.
But, I don’t like a) eating alone, and b) paying for food that is no better quality than I can cook at home.
I was going to fail in both a) and b) simply because I had the mindset that it was a “corporate expense” rather than a budgeted food expense account.
I was falling for mental accounting. As we discussed in “Small Business Debt is Debt Too,” mental accounting is what happens when Monkey Brain, your limbic system, decides that even though all of your money is green, some money is more important than other money. So, rather than saving up and spending cash for a vacation, Monkey Brain likes to say that “VACATION MONEY NOT COUNT” and convince you to go overboard in buying those fruity umbrella drinks and trinkets that they sell on the side of the road.
In this case, I’d mentally segregated business spending from overall spending, even though, as a solo entrepreneur, it all flows into the family’s funds.
But what about tax breaks? you ask.
Sure. There’s a lower after-tax cost to the meal if it’s associated with my business, and in this case, since it was associated with travel that occurred during a regular meal time, I had no problem justifying the business expense account.
Let’s look at the numbers, though.
- Cost of meal at restaurant: $15
- Reduced taxes (@28%): $4.20
- After-tax cost of meal: $10.80
Compared to eating at home:
- Cost of chicken breast: $2.50
- Cost of bag of steamable broccoli: $1.50
- Effective cost of propane for grill, spices, electricity for microwave: $0.05
- Total after-tax cost of meal: $4.05
I’m not making this point to harp on (or brag about) saving $6.75. It’s a bigger point.
The bigger point Expense Account.
Do you like how I called that out?
The bigger point is that when you’re an entrepreneur, particularly once you start to achieve a little success, it’s easy to start using mental accounting to justify a significant hedonic expansion of your business and your lifestyle because you can expense all of those items. Monkey Brain tells you that you need a new, shiny, fancy CRM system, supposedly ultra-comfortable Aeron chairs, 14 virtual assistants, Armani suits, and the like because it’s all a corporate expense account and those expenses don’t count.
They do. They count against your family’s bottom line.
If you’ve earned it, and you’re spending it on things which are important to you or critical to the growth and success of your business, then, by all means, go for it! Spend that money! That’s why you’re earning it!
But, don’t let mental accounting create an opening for Monkey Brain to dip his hand into your wallet and go crazy. Remember, your company’s wallet is your wallet.
Have you ever made a business purchase that you later regretted? Tell us about it in the comments below!